This includes payments to settle obligations from borrowings as well as cash outflows from cash-settled derivatives with negative market values. Financial liabilities that may be settled in advance without penalty are included on the basis of the earliest date of potential repayment. Cash flows for variable-interest liabilities are determined with reference to the conditions at the balance sheet date.
In 2010, we reduced net debt to € 221 million (2009: € 917 million). With a ratio of net borrowings over 12-month rolling EBITDA of 0.2 times at year-end, we are within the Group’s medium-term guideline of a ratio below two times. In the light of our available credit lines, financing structure and business model, we assess the likelihood of occurrence of financing and liquidity risks as unlikely, and therefore expect only a minor potential financial impact on the Group.
Currency risks for the adidas Group are a direct result of multi-currency cash flows within the Group. The biggest single driver behind this risk results from the mismatch of the currencies required for sourcing our products versus the denominations of our sales. The vast majority of our sourcing expenses are in US dollars while sales are denominated in other currencies to a large extent – most notably the euro. Our main exposures are presented in the adjacent table see 05. The exposure from firm commitments and forecasted transactions was calculated on a one-year basis.
In line with IFRS 7 requirements, we have estimated the impact on net income and shareholders’ equity based on changes in our most important currency exchange rates. The calculated impacts mainly result from fair value changes of our hedging instruments. The analysis does not include effects that arise from the translation of our foreign entities’ financial statements into the Group’s reporting currency. The sensitivity analysis is based on the net balance sheet exposure, including intercompany balances from monetary assets and liabilities denominated in foreign currencies. Moreover, all outstanding currency derivatives were re-evaluated using hypothetical foreign exchange rates to determine the effects on net income and equity. The analysis was performed on the same basis for both 2009 and 2010.
Based on this analysis, a 10% increase in the euro versus the US dollar at December 31, 2010 would have led to a € 3 million increase in net income. The more negative market values of the US dollar hedges would have decreased shareholders’ equity by € 157 million. A 10% weaker euro at December 31, 2010 would have led to a € 4 million decrease in net income. Shareholders’ equity would have increased by € 193 million see 06. To better reflect the current foreign exposure structure, we have included EUR/JPY sensitivity analysis. Following the change in the business model in 2010, the exposure of the currency pair USD/JPY was bifurcated into EUR/JPY and EUR/USD. The impacts of fluctuations of the US dollar against the Russian rouble and of the euro against the British pound and the Japanese yen on net income and shareholders’ equity are also included in accordance with IFRS requirements.
However, many other financial and operational variables that could potentially reduce the effect of currency fluctuations are excluded from the analysis. For instance:
Utilising a centralised currency risk management system, our Group hedges currency needs for projected sourcing requirements on a rolling 12- to 24-month basis see Treasury. Our goal is to have the vast majority of our hedging volume secured six months prior to the start of a given season. In rare instances, hedges are contracted beyond the 24-month horizon. The Group also largely hedges balance sheet risks. Due to our strong global position, we are able to minimise currency risk to a large extent by utilising natural hedges.
Exposure to foreign exchange risk1)
based on notional amounts, € in millions
|As at December 31, 2010|
|Exposure from firm commitments and
|Balance sheet exposure including intercompany exposure||(194)||13||(10)||25|
|Total gross exposure||(3,507)||393||322||350|
|Hedged with other cash flows||166||—||—||—|
|Hedged with currency options||576||—||(41)||—|
|Hedged with forward contracts||1,733||—||(222)||(266)|
|As at December 31, 2009|
|Exposure from firm commitments and
|Balance sheet exposure including intercompany exposure||(74)||(1)||7||0|
|Total gross exposure||(2,716)||342||245||200|
|Hedged with other cash flows||150||—||—||—|
|Hedged with currency options||532||—||—||(6)|
|Hedged with forward contracts||1,659||—||(260)||(120)|
|1)||Rounding differences may arise in totals.|
|2)||Adjusted for the USD/RUB forecasted transactions.|